The ATO has called out "reckless" and knowingly false claims of legal privilege being used by advisers to obscure probes into tax avoidance schemes, including efforts by firms to bury investigators with tens of thousands of documents.

ATO officials told Parliament the agency is aware of particular tax advisers marketing aggressive tax planning arrangements and seeking to hide their actions in ambit claims of legal and professional privilege.

Labor has put the firms on notice with its plan to double penalties for firms and individuals promoting tax avoidance if it wins this year's election.

Legal professional privilege gives clients the right to freely exchange information with their lawyers to obtain confidential legal advice.

Relevant facts

The privilege protects the client from being required to disclose information during legal proceedings, but does not protect clients from disclosing some facts relevant to their case.

Answering questions from Labor in Senate estimates, the ATO said it does not have a public view on where the boundaries of legal professional privilege should lie in relation to tax promoter rules, but warned efforts to misuse privilege to thwart investigations were damaging to the system.

"The challenge for the ATO with LPP is dealing with privilege claims not grounded in the law, but grounded in an attempt to obfuscate the facts," officials said.

"We are seeing more cases where claims of LPP are being made over thousands or even tens of thousands of documents.

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"Where reckless or knowingly false claims of privilege are made to obscure facts, this can frustrate and delay investigations."

Labor plans to double existing penalties for tax avoidance scheme promoters and allow the Federal Court to fine individuals up to $2.1 million and body corporates up to $10.5 million, or three times the amount received in the relevant tax scheme.

Potential reforms

The ATO told Parliament it had not made representations to the federal government about potential reforms to better define the boundaries of legal professional privilege.

"Only Labor will get tough on the promoters of tax avoidance schemes," Dr Leigh said.

"We'll double the penalties for those who abet breaking the tax laws, and remove the arbitrary public service staffing cap.

"The Liberals will always be the party of the bottom-of-the-harbour schemes, who've cut staff from the Tax Office, and refuse to crack down on systematic tax dodging."

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The ATO said it had gleaned valuable insights into taxpayers' affairs and advice from professionals, including from leaks such as the Paradise Papers, published by international news outlets led by the International Consortium of Investigative Journalists.

"Our ongoing investigations are uncovering evidence of marketed, aggressive tax planning arrangements, and we are considering the possible application of the promoter penalty law," officials said.

"The ATO recognises fraud or evasion are serious matters. The law allows the commissioner to assess tax outside of the usual time limits where the commissioner has formed an opinion a taxpayer's behaviour amounts to fraud or evasion."

The agency said delays in obtaining evidence can mean that a case cannot be brought to court due to the expiry of time limits.